Federal Communications CommissionFCC 02-43
Before the
Federal Communications Commission
Washington, D.C. 20554
In the Matter ofFederal-State Joint Board on
Universal Service
1998 Biennial Regulatory Review – Streamlined Contributor Reporting Requirements Associated with Administration of Telecommunications Relay Service, North American Numbering Plan, Local Number Portability, and Universal Service Support Mechanisms
Telecommunications Services for Individuals with Hearing and Speech Disabilities, and the Americans with Disabilities Act of 1990
Administration of the North American Numbering Plan and North American Numbering Plan Cost Recovery Contribution Factor and Fund Size
Number Resource Optimization
Telephone Number Portability
Truth-in-Billing and Billing Format / )
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) / CC Docket No. 96-45
CC Docket No. 98-171
CC Docket No. 90-571
CC Docket No. 92-237
NSD File No. L-00-72
CC Docket No. 99-200
CC Docket No. 95-116
CC Docket No. 98-170
FURTHER NOTICE OF PROPOSED RULEMAKING AND REPORT AND ORDER
Adopted: February 14, 2002Released: February 26, 2002
Comment Date: 30 days from publication in the Federal Register
Reply Comment Date: 45 days from publication in the Federal Register
By the Commission: Chairman Powell and Commissioner Martin issuing separate statements.
TABLE OF CONTENTS
Paragraph
I.Introduction...... 1
II.Overview...... 5
III.background...... 22
IV.Further Notice of Proposed Rulemaking...... 30
A.Contribution Assessment...... 34
1.Connection-Based Assessment...... 35
a.Operation of Proposed Connection-Based Assessment...... 35
b.Legal Authority...... 64
c.Potential Costs and Benefits of Connection-Based Assessment...... 70
d.Implementation Issues...... 74
2.Revenue-Based Assessment...... 84
B.Recovery of Universal Service Contributions from End Users...... 89
1.Universal Service Contribution Recovery Proposals...... 95
a.Carrier Flexibility...... 95
b.Collect and Remit...... 101
2.Labeling the Line Item...... 103
V.Report and order...... 110
A.Eliminating Circularity...... 112
B.Consolidated Form 499 Filing for Certain Contributors...... 116
C.Limited International Revenues Exception...... 123
VI.Procedural Issues...... 129
A.Ex Parte Presentations...... 129
B.Initial Paperwork Reduction Act of 1995 Analysis...... 130
C.Initial Regulatory Flexibility Act Analysis...... 131
D.Comment Filing Procedures...... 162
E.Final Regulatory Flexibility Act Analysis...... 167
VII.Ordering Clauses...... 178
Appendix A: Final Rules
Appendix B: List of Commenters
I.Introduction
1.In 1997, the Commission adopted a system under which telecommunications providers contribute to universal service based on their end-user revenues.[1] Since that time, the telecommunications marketplace has changed rapidly and technologies have evolved, with major developments including increased competition, migration to new products and services, and bundling of traditionally distinct services. These trends could erode the contribution base over time. In light of these trends, the Commission began a proceeding to revisit its universal service contribution methodology in May 2001.[2] Commenters have submitted a range of innovative ideas and proposals for reforming the current system, while others assert that the status quo should be maintained. We now seek to further develop the record on some of these proposals.
2.In the Further Notice of Proposed Rulemaking (Further Notice), we seek more focused comment on whether to assess contributions based on the number and capacity of connections provided to a public network, as proposed by some commenters.[3] We seek comment on whether a connection-based assessment approach would ensure the long-term stability, fairness, and efficiency of the universal service contribution system in a dynamic telecommunications marketplace. We also invite commenters to supplement the record developed in response to the 2001 Notice with any new arguments or data regarding proposals to retain or modify the existing revenue-based system.[4] In addition, we seek additional comment in the Further Notice on reforming the contribution recovery process to make it more fair and understandable for consumers.
3.In the attached Report and Order, we adopt certain modifications to the existing system. Based on examination of the record, we conclude that these modifications are warranted because they will streamline and improve the current system without undue disruption while we consider other, more substantial reforms.
4.Whereas this proceeding concerns the Commission’s methodology for assessment and recovery of universal service contributions generally, we seek comment in a companion proceeding on a different but related issue: in an evolving telecommunications marketplace, should facilities-based broadband Internet access providers be required to contribute to support universal service and, if so, on what legal basis?[5] That proceeding explores this question by seeking comment on what universal service contribution obligations providers of facilities-based broadband Internet access should have as the telecommunications market evolves, and how such obligations can be administered in an equitable and non-discriminatory manner. Commenters should be mindful of the relationship between this proceeding and the Broadband NPRM proceeding and, where appropriate, should address interrelated issues raised by the proposals detailed below.
II.Overview
5.Prior to passage of the Telecommunications Act of 1996, the Commission and the states oversaw a variety of explicit and implicit subsidy programs designed to reduce the cost of telecommunications services for consumers living in high-cost areas and for eligible low-income consumers. Universal service for high-cost areas helped to ensure that consumers in those areas paid rates for services comparable to those paid by consumers in low-cost areas, and the low-income program helped to make services more affordable for low-income consumers. Ensuring the affordability and availability of telecommunications services benefited consumers, and continues to do so, by increasing subscribership levels and, consequently, the value of the Nation’s communications network.
6.In section 254 of the Telecommunications Act of 1996, Congress further codified the Commission’s historic commitment to ensuring the affordability and availability of telecommunications services for all Americans.[6] Specifically, section 254(d) provides that federal support mechanisms should be specific, predictable, and sufficient to preserve and advance universal service, and that telecommunications providers should contribute on an equitable and nondiscriminatory basis.[7] The Commission implemented the current contribution system in 1997.[8] This system has two distinct but related components: the assessment of contributions on telecommunications providers; and the recovery of contribution payments by providers from their customers. Contributors are assessed on the basis of their interstate and international end-user telecommunications revenues, based on a percentage or “contribution factor” that is calculated every quarter.[9] The Commission recognized in 1997 that contributors likely would recover their contributions to universal service from their end users, although they are not required to do so.[10] Contributors are permitted to do so in any equitable and non-discriminatory manner. Many contributors elect to recover their contributions from their customers through a line-item fee, while others do not have a specific line item to recover the costs and instead recover them through their rates. As discussed below, in considering possible reforms to the universal service contribution system, we may determine that it is appropriate to modify the assessment and/or the recovery components.
7.Over the last few years, important changes have occurred in the interstate telecommunications marketplace.[11] Interstate revenues grew consistently between 1984 and 1997, when the current contribution system was adopted, and such growth was expected to continue. Recently, however, interstate revenues have declined for interexchange carriers,[12] which are now responsible for contributing approximately 63 percent of federal universal service funding.[13] Various factors may be responsible for this decline, including migration of customers to new products and services, local exchange carrier entry into the long distance market, and related price competition. If the current methodology is not modified or replaced, this trend could erode the contribution base over time, requiring increases in the contribution factor to maintain current levels of universal service support.
8.We also have observed broader fluctuations in the contribution base. The Common Carrier Bureau recently reported that annual end-user switched interstate telecommunications revenues declined in 2000, the first time since such data has been compiled.[14] We also observed a decline in assessable revenues in the first half of 2001.[15] One analyst projected that United States long distance revenues would decline 12 percent in 2001.[16]
9.Competition in the interexchange market continues to increase. For example, Regional Bell Operating Companies (RBOCs) increasingly are providing interstate long distance service. To date, the Commission has granted RBOCs approval to offer in-region interLATA service in nine states: Arkansas, Connecticut, Massachusetts, Missouri, New York, Pennsylvania, Kansas, Oklahoma, and Texas.[17] One analyst recently reported that Verizon and SBC already have captured 25 percent of the long distance markets in New York and Texas, respectively.[18] Verizon recently reported that it is the fourth-largest residential long distance provider in the nation based on subscriber market share.[19]
10.Because the current contribution system is based on historical revenues, some commenters contend that it creates competitive advantages for contributors with increasing interstate telecommunications revenues, while disadvantaging those with declining revenues.[20] Under the current system, contributors are assessed on revenues that they earned six months earlier.[21] As a result, contributors with increasing revenues recover contributions from a larger revenue base than the one on which they are assessed, and can pass through to their customers lower fees than competitors with declining revenues, who must recover their contributions from a declining revenue base. New entrants also may be able to undercut the prices offered by established service providers who already contribute to universal service, because they do not contribute for the first six months that they provide service due to their lack of historical revenues for that period.
11.In addition, the growth of Commercial Mobile Radio Service (CMRS) appears to be causing a significant migration of interstate telecommunications revenues from wireline to mobile wireless providers.[22] Since the current assessment system was adopted in 1997, mobile telephony[23] subscribership has increased from 55.3 million to 109.5 million subscribers, and average customer minutes of use have increased from 117 minutes per month to 255 minutes per month.[24] Consistent with these trends, mobile service is becoming a substitute for traditional wireline services such as payphones and second lines to the home,[25] and there is a small but growing number of customers who have substituted mobile wireless for their primary residential lines.[26] In addition, many customers are using their mobile service rather than interexchange service to make long distance calls: according to one report, 16 percent of customers surveyed now make most of their long distance calls using mobile services.[27] In some areas, such “technology substitution” has begun to erode revenue from interexchange services, which is currently the primary contribution source for universal service funding.[28]
12.Since 1997, marketplace developments also have blurred the distinctions between interstate/intrastate and telecommunications/non-telecommunications revenues on which the current contribution system is based. For example, carriers increasingly are bundling services together in creative ways, such as by offering flat-rate packages that include both local- and long-distance services. Virtually all of the major mobile telecommunications service providers now offer a type of Digital-One-Rate (DOR) pricing plan that allows customers to purchase a bucket of minutes on a nationwide, or nearly nationwide, network without incurring roaming or long distance charges.[29] A number of carriers, including AT&T Wireless, Verizon Wireless, and Cingular Wireless, also have begun offering regional DOR calling plans.[30] At the end of 2000, approximately 20 million mobile wireless telephone customers subscribed to calling plans that do not charge extra for long distance.[31] The availability of such plans compounds the inherent difficulty of identifying interstate revenues in a mobile environment.
13.Likewise, more and more carriers now offer bundled packages of telecommunications services and customer premises equipment (CPE) or information services. The accelerating development of new technologies like “voice over Internet” increases the strain on regulatory distinctions such as interstate/intrastate and telecommunications/non-telecommunications, and may reduce the overall amount of assessable revenues reported under the current system.[32] Additional legal, technological, and market developments that we cannot foresee also could significantly impact the universal service contribution base.
14.In light of these and other changes in the telecommunications marketplace, we have recognized the need to review the current system for assessing universal service contributions. Fifty-nine parties filed comments in response to the 2001 Notice.[33] Our examination of the record reveals a consensus that reforms are necessary, although different industry segments differ on what reforms should be undertaken.[34] Some commenters support retention of the current revenue-based assessment system.[35] Other commenters support modifying the current system, for example, by assessing contributions on projected or current revenues rather than historical revenues.[36] Still other commenters support replacing the current revenue-based assessment system with one that focuses on connections.[37]
15.Our primary goal in considering possible reforms of the current assessment system is to ensure the stability and sufficiency of the universal service fund as the marketplace continues to evolve. We also seek to identify the best means of ensuring that contributors continue to be assessed in an equitable and nondiscriminatory manner. In addition, we seek to provide certainty to market participants, and minimize the regulatory costs of complying with universal service obligations. Achievement of these goals, in turn, should benefit consumers by helping to ensure that the contribution recovery process is fair, reasonable, and readily understood by consumers.
16.In this Further Notice, we seek comment on whether to base contributions not on a contributor’s revenues, but on the number and capacity of the connections it provides to a public network.[38] Under this proposal, contributions for residential, single-line business, and mobile wireless connections would be assessed on a flat, monthly basis. Contributions for multi-line business connections would be calculated to recover the remaining universal service funding needs, based on the capacity of the connections provided. In addition, we seek comment on a variant of a connection-based assessment methodology that would maintain the relative contribution burdens on different industry segments.[39] We also invite commenters to supplement the record developed in response to the 2001 Notice with any new arguments or data regarding whether to retain or modify the existing system.[40]
17.As discussed in more detail below, a connection-based assessment may address the difficulty of applying regulatory distinctions inherent in the existing system to new services and technologies. By harmonizing the contribution system with the telecommunications marketplace, a connection-based assessment approach may help to ensure the stability and sufficiency of the universal service contribution base over time. Such an approach also may provide contributors with greater certainty, reduce administrative costs, and avoid marketplace distortions, ultimately benefiting consumers. Moreover, by eliminating some of the complexity involved with contribution recovery fees and making only one provider responsible for contributing based on a single connection, a connection-based assessment also may make the recovery process more understandable for consumers. Furthermore, by reducing costs associated with the recovery of contributions, a connection-based assessment also may reduce the total amount that consumers pay in contribution recovery fees.
18.Our experience over the last few years also has led us to reevaluate carrier recovery practices. Carriers currently have the flexibility to recover their contribution obligations in any manner that is equitable and nondiscriminatory. Some elect to recover their contributions from their customers through line-item charges, while others elect to collect their contribution requirement through their rates. Although the contribution factor is uniform for all contributors, universal service line items to consumers may vary widely among contributors, and often significantly exceed the amount of the contribution factor.[41] For example, in the second quarter of 2001, after the Commission established a contribution factor of 6.882 percent,[42] one interexchange carrier raised its residential universal service line item to 12 percent.[43] That carrier’s residential line item was subsequently reduced to 9.9 percent. Another interexchange carrier increased its residential line item to 11.5 percent on January 1, 2002, even though the contribution factor recently decreased from 6.918 in the fourth quarter to 6.808 percent in the first quarter.[44]
19.Some carriers also employ different recovery methods for different customer groups, imposing universal service line-item charges on certain categories of presubscribed customers, but recovering an undisclosed amount from other customers through per-minute service rates. For example, some carriers do not recover universal service contributions from certain categories of customers, such as dial-around customers.[45] In addition, universal service line-item percentages for residential customers often are higher than those for business customers.[46] Other carriers charge customers large, up-front universal service fees that are unrelated to their revenues from a customer.[47] Such practices may be inexplicable to the casual observer, and may shift a disproportionate share of the cost of contributions onto certain customer classes.
20.In this Further Notice, therefore, we seek comment on how to modify our rules to ensure that carriers that elect to recover their universal service obligations from their customers do so in a manner that is reasonable, fair, and understandable. In particular, we seek comment on whether to require carriers that elect to recover through separate universal service line-item charges on any customer bill to apply a uniform line item on all customer bills. To further develop the record in the Truth-in-Billing proceeding, we also seek comment on whether to require carriers to describe such line-item charges on customer bills as the “Federal Universal Service Fee.”[48] We seek comment on whether these proposals would help to prevent consumers from being charged excessive universal service fees, to make the recovery process more understandable for consumers, and to ensure that carriers do not recover more from certain customers or classes of customers than from others. We also seek comment on whether the proposed reforms would place significant administrative or financial burdens on contributing carriers and on the potential benefits and costs for consumers.